Democratic Dividend

Financial Times Online
March 27, 2010
By James Politi

Washington, DC, is at its best in the springtime. The pale pink and white tint of the cherry trees in bloom around the tidal basin - a small man-made lake surrounded by presidential monuments - is only the most celebrated sign of a city whose many parks make it among the most livable in the world.

This year, as the torpor of a particularly snow-bound winter fades into the distance, hope is growing among the city's property agents that they will also see the blossoming of Washington's market for luxury homes and apartments. The US capital has not been immune to the housing crisis that continues to ravage America, with many outlying suburbs still suffering from a big overhang of unsold homes and many properties in foreclosure but it has been faring better than the rest of the country, thanks to the fact that the home-town industry is the government, which is relatively recession-proof.

According to the widely followed Standard & Poor's Case-Shiller index, home prices in 20 large US cities declined 3.1 per cent last year, while prices in Washington rose 1.9 per cent.

The Knight Frank Prime International Residential Index, published recently by the UK property group, suggested that Washington's higher-end homes - worth $1m or more - are doing well. Knight Frank says that luxury prices in the top neighborhoods of the US capital rose 5.6 per cent last year, compared with a 12.5 per cent decline in Manhattan.

Bolstering the argument for a "boomlet" in luxury DC properties are several developments since President Barack Obama took office in January last year. One is the eruption of new legislative activity that has come with the new administration.

As Obama has pressed forward with efforts to reform the healthcare industry, revamp financial regulation and pursue new climate-change proposals, the city has been swamped with supports and opponents of his efforts.

Amounts spent on lobbying in 2009 rose about 3.4bn, according to the Center for Responsible Politics, breaking all records. Meanwhile the financial crisis forced the government to take stakes in several key chunks of the US economy, from Wall Street banks to Detroit carmakers. Many of those affected - some of whom still have deep pockets - are spending more time than ever in Washington and often need a comfortable home or apartment to live in. "More and more senior bank staffs have migrated to the city, joining the expanding range of hedge funds who have settled in the past few years," says Liam Bailey, head of residential research at Knight Frank in London.

On the ground, however, Washington property agents have seen few, if any, signs of an Obama-led "boomlet" in luxury properties. "It would be very hard for me to believe that the upper brackets have gone up in price," says Donna Evers, a 30-year veteran of the Washington property markets who founded her own agency, Evers & Company, based in the leafy north-western neighborhood of Chevy Chase. Evers argues that buyers of luxury properties have been suffering from a combination of depleted stock market portfolios and the reluctance of banks to extend credit.

"What I am seeing is that prices are not going up," says Eldad Moraru, an estate agent in the Maryland suburb of Bethesda and author of the upcoming DC Real Estate Guide. He says the changeover in administrations had only a "minimal effect" and was "always grossly overstated". Both Moraru and Evers say that the low mortgage rates and government incentives are spurring sales mostly in the price range between $300,000 and $800,000, where first-time middle-class homebuyers are most active.

Nevertheless, there are some promising signs for luxury properties, including the recent rebound in US equity prices. Evers says that "finally" she is beginning to see mortgage loans in the $1.5m-$2m range, which would hit the sweet spot for many luxury apartments and some nice homes. "That's pretty good money," she says. Moraru says the "speed" of the market seems to be accelerating. "Inventory is being absorbed at a faster rate. Things that sat and sat for months are getting sold," he says, adding that with no new projects for luxury properties breaking ground, the supply of such homes is declining at a healthier clip.

One interesting feature of the post-recession Washington property market, according to Moraru, is that buyers are more interested in quality than size. "People are trying to look less ostentatious," he says. This is understandable in light of the fact that lobbyists as well as bankers and executives from other bailed-out sectors have been targeted for sometimes vitriolic populist rhetoric.

Nevertheless, Moraru says the focus on quality means that if buyers are paying a high condo fee for a luxury building they are insisting that it include use of several key amenities, such as a gym, a party room and even a roof-top deck from which to view the fourth of July fireworks display on the National Mall.

Possibly facilitating the development of a luxury "boomlet" in Washington are the enormous strides the city has made during the past decade in terms of livability - despite recent criticism of the response to last month's huge snowstorms.

Rampant crime used to be one of the US capital's biggest problems but homicides in the District of Columbia fell from 472 in 1990 to 143 last year and there were only 17 killings in the early months of this year, which already marks a 30 per cent reduction compared with the same period in 2009. In addition, several neighborhoods have undergone successful redevelopments. Parts of Capitol Hill and South-East Washington, which were once off-limits in terms of luxury living, have also become more accessible in the past decade, in addition to the more classic higher-end neighborhoods such as DuPont Circle, Chevy Chase and Georgetown.

The Penn Quarter district - a previously empty area of downtown - has been a big success story. Since the 1990s the area has witnessed the arrival of a new sports and entertainment arena, the Verizon Center, as well as more recent additions such as the Newseum, a museum dedicated to journalism, and The Source, a restaurant by celebrity chef Wolfgang Puck. The German Goethe Institute and the E-Street Cinema, which shows independent and foreign films, are also nearby. "You really feel like you are in a city; it's a smaller version of New York," says Moraru.